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10. Fair Value Measurement
Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value:
Level 1: Observable inputs that reflect unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Assets and Liabilities Measured at Fair Value
The derivative liability associated with the interest rate swap is considered to be a Level 2 instrument. The interest rate swap was a standard cash flow hedge with a fair value estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves. See Note 9, Derivative and Other Comprehensive Income, for the discussion of the derivative liability.
The Company’s deferred compensation plan is a nonqualified deferred compensation plan which allows highly compensated employees to defer a portion of their base salary, variable compensation and commissions each plan year. The carrying value of both the liability for the deferred compensation plan and associated life insurance policy are equal to their fair value. These agreements are required to be measured at fair value on a recurring basis and are valued using Level 2 inputs. As of September 30, 2012, and December 25, 2011, a liability for participant contributions and investment income thereon of $2.9 million and $2.6 million, respectively, is included in other non-current liabilities. To offset its obligation, the Company’s plan administrator purchases corporate-owned whole-life insurance contracts on certain team members. The cash surrender value of these policies as of September 30, 2012, and December 25, 2011, was $2.9 million and $2.5 million, respectively, and is included in other assets, net.
As of September 30, 2012, the Company had no financial assets or liabilities that were measured using Level 1 or Level 3 inputs other than the tangible and intangible assets and liabilities recorded for the franchise restaurant acquisition discussed in Note 6, Acquisition of Red Robin Franchised Restaurant. The Company also had no non-financial assets or liabilities that were required to be measured at fair value on a recurring basis.
The following table presents our assets and liabilities that are fair valued on a recurring basis for the quarter ended September 30, 2012, and for the fiscal year ended December 25, 2011 (in thousands):
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|
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September 30,
2012
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|
Level 1
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Level 2
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy
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|
$
|
2,890
|
|
$
|
—
|
|
$
|
2,890
|
|
$
|
—
|
|
|
Total assets measured at fair value
|
|
$
|
2,890
|
|
$
|
—
|
|
$
|
2,890
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
1,220
|
|
$
|
—
|
|
$
|
1,220
|
|
$
|
—
|
|
|
Deferred compensation plan
|
|
2,930
|
|
—
|
|
2,930
|
|
—
|
|
|
Total liabilities measured at fair value
|
|
$
|
4,150
|
|
$
|
—
|
|
$
|
4,150
|
|
$
|
—
|
|
|
|
|
December 25,
2011
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy
|
|
$
|
2,534
|
|
$
|
—
|
|
$
|
2,534
|
|
$
|
—
|
|
|
Total assets measured at fair value
|
|
$
|
2,534
|
|
$
|
—
|
|
$
|
2,534
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
534
|
|
$
|
—
|
|
$
|
534
|
|
$
|
—
|
|
|
Deferred compensation plan
|
|
2,608
|
|
—
|
|
2,608
|
|
—
|
|
|
Total liabilities measured at fair value
|
|
$
|
3,142
|
|
$
|
—
|
|
$
|
3,142
|
|
$
|
—
|
|
Disclosures of Fair Value of Other Assets and Liabilities
The Company’s liabilities under its credit agreement and capital leases are carried at historical cost in the accompanying consolidated balance sheet. For disclosure purposes, we estimate the fair value of the credit facility and capital lease obligations using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt. The inputs used to value both the credit facility and the Company’s capital lease obligations are considered to be Level 2 instruments. The carrying amount of the Company’s credit facility as of September 30, 2012, and December 25, 2011, was approximately $121.9 million and $146.3 million, respectively. The fair value of the Company’s credit facility as of September 30, 2012, and December 25, 2011, was approximately $120.9 million and approximately $147.6 million, respectively. There are $10.1 million of outstanding borrowings recorded for the Company’s capital leases as of September 30, 2012, which have an estimated fair value of $11.3 million. At December 25, 2011, the carrying amount of the Company’s capital lease obligations was $10.7 million, and the fair value was $11.7 million.
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